Selling your business is a big decision. You gave birth to this business, you built it according to your vision, you vacuumed the office before you had a cleaner to do it, and you didn’t pay yourself when you needed to invest in more people and new systems. If you had a brilliant idea in the shower one morning, you could make it happen that afternoon. Your DNA runs through this business and despite its size, you still control how it’s positioned and what it delivers. It may be your baby, but once you’ve sold it, it won’t be your baby any more. Too many acquisitions fail to fulfil their potential because the sellers and buyers don’t spend enough time talking about the emotional challenges involved in selling the baby.
The communications agency landscape provides us with many lessons for both buyers and sellers on what makes a successful acquisition and how to integrate or merge human capital businesses. It’s a sector that has been consolidating with a vengeance during the last ten years, as the holding companies have bought out the independent players, and this consolidation has been so effective that it has probably changed the landscape for good in most of the world’s key markets as far as start-ups are concerned. Never has it been more challenging to launch a mainstream creative agency start-up.
A number of factors have driven the volume of acquisitions in recent years. First off, there has been the need to establish a foothold in the key growth economies and emerging markets. If your proposition is global, you need to have a strong presence in China, and WPP bought some of the best independent communications agencies in China before the other holding companies’ feet had even touched the ground at Pu Dong airport when it opened in 1999. More recently, Publicis Groupe’s spate of acquisitions during the last three years in Brazil, and the multiples that they have (allegedly) paid, feel like a vanity project and knee jerk reaction to WPP’s success in China. Time will tell whether Publicis over-paid for these acquisitions in Brazil but the Brazilian economy has faltered (GDP likely to have grown as little as 1% in 2012) and WPP own two of the top three networks in Brazil (as they do in China), and have grown these organically in Brazil. The imperative to build a credible foothold in key emerging markets has driven a significant proportion of M&A activity.
The second factor is digital, and the failure, by and large, of the traditional creative agencies to develop a full service digital offering. The holding companies have been acquiring digital independents in all their key markets – some of which have continued to trade as stand-alone local or global digital independents, and some of which have been merged into creative or media networks. And when you consider that we’re not just talking about full service digital agencies (WPP’s acquisition of AKQA, for example, and Publicis Groupe’s acquisition of LBi), but also the acquisition of specialist shops that deliver web, mobile and app development, social media activity and search marketing skills, we’re talking about a huge volume of strategic acquisitions to ensure that the groups have future proofed themselves with a comprehensive digital capability. Mobile currently tops the digital acquisition wish list.
The third factor, and what has traditionally been the key driver for acquisitions, is the shoring up of creative agency brands that have been going through a period of managed decline in key markets, and where transformational leadership on its own is unlikely to restore reputation and deliver organic growth. DDB London’s acquisition of Adam & Eve is an obvious example. McCann-Erickson’s acquisition of W/Brasil is Sao Paulo is another.
And finally, the increased activity by the main Asian owned groups has changed the global landscape. Dentsu’s acquisition of McGarry Bowen, and Cheil’s acquisition of the Barbarian Group and McKinney (all in the US) deliver an entirely new cultural dimension to the concept of selling your baby, when the new parents have grown up in a totally different agency culture.
Even in staunchly independent markets like Germany, where the independents still control an estimated 70% of spend through creative agencies, one senses that the tide is starting to turn, as local icons consider selling to non-German parents.
This dramatic global consolidation has impacted on the smaller independents and start-ups in two ways. Firstly, it’s getting tougher and tougher to run a commercially successful independent when more and more of your competitors have been absorbed by the major groups. Yes, if you have great talent and a compelling proposition, there’s a narrative around being independent that can resonate with clients (predominantly local clients). And these agencies, with a strong sense of self, are often more appealing to agency talent. But in a world where retainers are being replaced by project fees, the time spent by independents on business development and maintenance of the pipeline is a disproportionate drain on resources, whereas the competitor that is now part of a larger group has more support in areas like finance and IT, and can shake all those existing client trees within the parent group to catch the hanging fruit. It takes far less time that they spent trying to get through the door of new business prospects when they were independent. Secondly, a lot more of the entrepreneurs who run independents know other entrepreneurs who have sold their businesses to major holding companies and groups than would have been the case ten years ago. I’ve been struck by how many of the digital specialist independents have a mate of a mate who recently sold their business to a group. This means that they often have a point of view on what it’s like to sell to one parent compared to another, and their mate’s experience helps to drive a better understanding of what it might be like to sell their baby. They understand that they will lose control, and they talk much more about cultural fit with the acquirer than they would have done even five years ago. When you combine these two trends, what you find is a number of successful independents who want to sell in order to accelerate their growth through ownership by a group and the access that this will give them to clients, but they’re frightened of selling to a holding company or group that doesn’t seem to have any cultural empathy with their business. Multipliers are important, but holding company ‘parenting’ reputations will become increasingly important as well, when competing for the very best acquisitions.
From all of this, you’ll have gathered that there are some important lessons to be learned when it comes to selling the baby.
Firstly, be clear about the key drivers for the sale. If it is about maximizing earnings from the sale, don’t just look at multipliers based on projected revenue and profit through the earn out. Think about which buyer is likely to deliver clients that will fund the earn out and deliver real revenue opportunities, and what kind of additional support the different purchasers might bring to bear.
Secondly, be clear about what it means to lose control and think about how you will have to evolve in order to remain motivated and engaged. If you don’t enjoy stakeholder management and quarterly financial reporting, put somebody in charge of this who does. Expect things to move more slowly and find deep reserves of patience that you didn’t know you had.
Thirdly, sell to a parent who respects you for who you are and who appears to get you, whilst ensuring that there’s mutual recognition and alignment on what it’s likely to be like post-sale. Be prepared, on occasion, to work alongside leaders from other group companies that you wouldn’t have hired to pour the coffee in your own business. View them all as one big, dysfunctional family and recognise that every family has its ‘uncle Bob’.
Fourthly, don’t forget your clients and your staff. Selling a business is a huge distraction and sometimes the clients get forgotten in all of this.
And finally, acknowledge that selling the baby is a hugely emotional, life changing thing to do. Don’t be afraid to show your human side when you do it. Your clients and your staff will appreciate the sentiment. After all, it’s their baby as well.
An edited version of this post can also be found on Brand Republic;